When New York Attorney General Eliot Spitzer unveiled his $1.4 billion settlement with Wall Street's top banks and wirehouses in late April, a collective sigh of relief could be heard at many brokerage offices. Now, the thinking went, clients would have a reason to believe their reps again. And maybe reps could move on, too.

No such luck. For many clients, the settlement hasn't brought closure to the scandal nor done anything to restore brokers' prestige. The settlement, says one Morgan Stanley rep, was not a big enough event to blot out the memory of their losses. “It's hard to explain that, ‘Hey, that stuff you've been reading about, that wasn't me, that was somebody else,’” he says. “People have too much going on to really sit down and strip through whose fault it is. All they know is their money is gone.”

So, even though the settlement ends one of the most harrowing practices of the bubble — using research to push the shares of investment banking clients — the Spitzer deal is not the all-clear signal many in the industry were hoping for. One possible reason: Since the bull market collapsed, strategists and pundits have repeatedly told the public that it was safe to pile back into equities. “I never want to hear the phrase, ‘The worst is behind us’ again,” says one broker. “And neither do clients. They just don't believe it anymore.”

Little wonder that a recent Securities Industry Association study found that 41 percent of investors list dishonesty as the industry's most pressing concern. Rebuilding trust is paramount, brokers say, but accomplishing this feat will take more than a legal settlement. Indeed, the news around the settlement brought back all the stories of the industry's malfeasance, and added some juicy new details, as Spitzer's staff released emails and other evidence. Those emails, in fact, reveal that brokers were deeply troubled by the tainted research (see Endpiece, page 104), but clients seem not to recognize that, reps say.

That leaves brokers hoping that the markets will convince the public that it's okay to deal with a broker again. And the markets are looking more cooperative: There were some solid gains following the end of the shooting war in Iraq on April 14 and, despite the still-teetering economy, there has been a drumbeat of bullish predictions by pundits (including confirmed bears, such as Steve Leuthold, of Leuthold Weeden — see story p. 68), reps say they still have trouble getting existing clients and prospects off the sidelines.

Meanwhile, the litigation machine grinds on, thanks in part to the evidence that Spitzer released. The memos, emails and other material are expected to provide fodder for a wave of arbitration cases against the 10 firms by thousands of aggrieved investors. Since the evidence was posted on the Internet, at least one plaintiff attorney is advertising for retail investors who think they have a case.

Legal experts say that these actions are unlikely to name individual brokers, unless there is some evidence that a rep knowingly duped his retail clients with the tainted research to push product. Charles Parker, a securities lawyer at Hill Parker & Roberson in Houston, says he knows of only one broker to be named in a suit related to Grubman and his telecom recommendations, but the claim was based more on financial advisory malpractice than on a broker's use of tainted research.

On the other hand, there are some brokers who are so angry and bitter about the research scandal and its impact on their practices that they are secretly helping the plaintiff attorneys. Parker says that on more than a few occasions, he has received tips and evidence from brokers who want to help clients get something back from the firms. “Brokers are the ones bringing us business,” Parker says. “They are pissed off. They feel betrayed. They call me or the client calls me saying that John Smith at such-and-such firm told me I should call you. He put stocks in my account based on this research.” Parker says that he has about a dozen tainted research cases against Smith Barney and Merrill Lynch that came “unsolicited” from brokers.

Other securities lawyers have told him to expect “hundreds” more. Arbitration cases, of course, cannot be tried as class-action suits, so each and every one of these will be heard individually, in small groups, or settled, Parker says. This is one reason why the Spitzer evidence is so essential to the arbitration process. “Without those Spitzer-related documents, you simply could not afford to make this kind of discovery,” Parker says.

What might this wave of arbitration cost Wall Street firms? It's hard to say, of course, but Brad Hintz at Bernstein Research reckons in a recent research report that it could cost the firms an additional $3.5 billion. And that figure could be conservative, he says.